My goal is to share ideas and concepts you’re not going to hear talked about by the majority of mainstream financial advisors. I’m not doing this because I’m trying to be contradictory to what other advisors teach. I’m doing it because my research has shown that if you cannot eliminate the risk facing your retirement, your chances of having the retirement you’re dreaming of will be substantially reduced. This leads me to, “The Fiscal Gap in America”— a topic that most financial advisors are aware of, but very few advisors are ever willing to talk about.
Do any of you remember your first experience with a credit card? If you’re like many Americans, the experience went something like this. You showed up to your first day of college and your VW bus was tricked out with recently shined white wall tires and shag carpet curtains. You jump out of the bus with your newly pressed bell bottom jeans and your button up shirt that had more colors than Leonardo da Vinci’s paint palette, excited to make your grand entrance as the coolest freshman to ever enter college.
After walking half a mile across campus, you finally arrive at your destination. As you open the doors and take your first step into the student union building, you can’t help but notice a bunch of tables lined up that are covered with some amazing swag. Anything from water bottles to beach towels, they’re even t-shirts with your college logo. After walking around in a trance for a few minutes, you finally decided to approach the table that is covered with fuzzy dice.
As you arrive at the table, you ask the person who appears to be in charge of the table how much it would cost you to buy a pair of these dice because we all know when you own a VW bus, a pair of fuzzy dice is a must-have. The person behind the desk responds that they are not for sale. However, they would happily give you a pair of the dice if you just complete a credit card application.
You fill out the application, and you get the free dice, which moves you one step closer to being the most cool freshmen ever, and you also qualify for a credit card with a $500 limit. The first month after receiving the card, you start using it to pay for your dinners out with friends and swag for the VW bus. A magical thing starts to happen. Your bank account is still loaded with money.
You say to yourself that this is awesome. The next thing you do is you start going out, spending down your bank account like you would any other month. The end of the month comes, and you still have a few bucks in your account. You question if life could get any better.
Then the day of reckoning finally arrives. Your credit card statement shows up in the mail. You open it up and about pass out once you realize you owe the credit card company just under the $500 limit. But now you only have a few bucks left in your bank account to pay the bill.
The fiscal gap in America is very similar to your own financial situation as it relates to that credit card bill you completely forgot about until this time. Statements just showed up in the mail. Only when it comes to the fiscal gap, we need to add a lot more zeros than you could ever get onto any credit card statement.
The fiscal gap is the difference between the unrecorded liabilities America is responsible for and the expected assets the government plans to have available when these liabilities come due. These are liabilities that are not currently included on the financial statements of the government. When you consider liabilities, such as Social Security, Medicare and the national debt, the fiscal gap is almost incomprehensible.
Some economists project the amount to be somewhere north of $200 trillion. Yes, that is a two with 14 zeros after it. According to more conservative estimates, the fiscal gap is somewhere between 100 and 100 and 50 trillion, which is still completely out of control. Now, why do we even care about the fiscal gap and why am I taking time to talk about it.Isn’t it just easier to live our lives and let things keep working as they are? The U.S. has made it this far, doesn’t that mean we will continue to move forward without any issues?
As solid as some of these arguments are, we care because when it comes to financial responsibility, there is always a day of reckoning. Think back to that maxed out credit card from back in college. As much of a shock as it was to get the first statement, it came with a short term get out of jail free card that most people took advantage of, which was that you could pay a small portion of what you owed on a monthly basis. But in order to accept this option, you would have to agree to pay interest on the outstanding balance.
For many people, this was the beginning of the end. In the beginning, they tried to keep up with the interest that was increasing on a monthly basis. But in the end, some couldn’t do it ,and they ended up in bankruptcy.
As a country, we’re in a period of time where the government is paying a historically low interest rate, which is providing us some huge benefits as a country because the monthly payments on our current national debt are at the level we can keep up with. But what happens if we increase the debt 5 to 10 times from the $26.5 trillion we’re currently paying interest on and interest rates were to increase substantially?
At this point, the government is left with only two options. First, instead of going bankrupt, like you and I would have to do, they have the option to print more money, which all sounds good until it starts creating hyperinflation because the demand for goods and services has increased, but we have a huge supply of money. Second, the government can increase taxes.
Unfortunately, if you’re living on fixed income during retirement, both options will cause you to be the biggest loser. If you do not find your own solution to solving the problem, when it comes to inflation, you will not be able to stop the printing presses, but you can prepare yourself by making sure you have the correct amount of guaranteed inflation adjusted lifetime income.
The base of this income will be your monthly Social Security check, but Social Security is only meant to cover about 40% of your income needs and retirement. You will need another solution. One option is a government or employer pension, but as we all know, pensions are becoming extremely rare and hard to find. That takes us to the other option, which is a fixed indexed annuity.
Now, I realize that many of you may have misgivings about annuities. And that’s okay. I’m not asking you to love annuities, but I’m asking you to reconsider them. Because as longevity increases, and government financial stability decreases, annuities can be a great way to eliminate many of the risks your retirement will face. Because not only can a fixed indexed annuity provide you with a guaranteed stream of income—no matter how long you live—it can also provide you with inflation adjusted income for as long as you live, which is a huge benefit in retirement.
Now as important as annuity can be in a good tax free and risk free retirement plan, please prosperity nation, do not just rush out and buy an annuity for the sake of buying an annuity. An annuity should be included as part of an overall plan that is structured by a professional, who is trained in what it takes to get you to the tax free and risk free retirement.
When it comes to the government’s need to increase taxes and with the interest they will be charged as a result of the fiscal gap, you’re not going to be able to stop them from doing this either because the debt is already incurred. However, you can put yourself in a position where taxes will not have to go up for you. You can do this by getting yourself into the zero percent tax bracket in retirement. You have just over five years before taxes are expected to go up, which gives you knowledge you can then turn into power to change your future. With appropriate planning, you can move yourself off the train tracks, have higher tax rates, and into an environment where you can set yourself up with a tax-free retirement.
In order to do this, though, you need to be willing to pay the entry fee, which is you must be willing to pay taxes now because for you to get to the zero percent tax bracket in retirement, you’ll need to transfer assets from the taxable and tax deferred bucket. During this time of historically low tax rates as with your annuity, it’s very important to get a professional involved to help you do this. If you don’t structure everything correctly, you may find you’re creating a bigger issue than you’re trying to solve.
The fiscal gap is real. And there will come a day America will have to suffer the consequences of uncontrolled spending and a political system that punishes candidates who are willing to try to address the future financial viability of our country. But remember, there is good news, and the good news is you have time to prepare for the uncertainties of the future.